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You ruined my wedding – and you’re suing me?

March 26th, 2014 | No Comments | Posted in Business

More dentists and wedding singers insist on non-disparagement clauses

By signing on the dotted line, or agreeing to those endless terms of service, some customers are unwittingly giving away their right to free speech. Specifically, the right to write negative online reviews.

Experts say that more companies from wedding photographers to dentists are slipping non-disparagement clauses (and other language that prevents consumers from writing negative reviews) into the fine print almost no one bothers to read. Consumers who violate these policies may be sued and fined — even if the complaints are 100% true.

Anja Winikka, the site director for TheKnot.com, heard about two cases like this among brides in just the past couple of months. In one of the instance, a photographer threatened a bride with a $350,000 lawsuit over a bad review the bride wrote, after the bride says she had unknowingly signed a contract that included a so-called non-disparagement clause in it, she says. And Scott Michelman, an attorney with Public Citizen, a nonprofit consumer advocacy firm, says he thinks these kinds of cases are new in the past few years — and that recently “we’ve been hearing about them more.”

Part of the impetus behind companies adding in these clauses is the fact that an increasing number of people both write online reviews of companies and turn to online reviews to figure out what companies to do business with, says Michelman. As of the fourth quarter of 2013, there were more than 53 million reviews on Yelp (the number of reviews on the site grew 47% from the year prior) and currently the site has more than 120 million monthly visitors. But a bad review can hurt business, so companies are trying to prevent consumers from “trash-talking” them — even when said trash talk is true. (Some employers have long required employees to sign these kinds of non-disparagement contracts when they leave a company.) Typically, a person has the right to give their opinion or to make true statements of fact about a business; making false statements, on the other hand, is often libel, and plenty of people making such comments online already get sued for that.

Faced with such restrictions, some consumers, of course, simply remove the offensive post or pay the fine demanded by the company. Others fight back. New York resident Robert Allen Lee claims his dentist threatened him with more than $110,000 in fines after he alleged on Yelp and DoctorBase that she overcharged him and failed to submit his paperwork to the insurance company; in the packet that new patients like Lee sign, the dentist had included a privacy clause that prohibits clients from making public statements about her and that assigns her the copyright in anything they write about her, according to court documents. Lee is now suing the dentist, claiming that he doesn’t owe her that money (he also asserts that his statements about her are true). The dentist could not be reached for comment, but she did file a motion to dismiss Lee’s case (the motion was rejected by a judge last year); the company that created the contract the dentist used has since removed that language from its contracts.

And Lee isn’t the only angry customer taking a company to court over this issue. In December of 2008, Utah resident John Palmer claims he tried to make a purchase from online retailer KlearGear.com, but never got the goods he ordered. Angry at the company, his wife Jennifer Kulas posted a negative review of them on RipoffReport.com in February 2009, hoping that it would inform others of the alleged actions of the company. But the result wasn’t at all what the couple expected: KlearGear allegedly fired back at the couple, demanding that the review be removed or the couple pay $3,500 in damages, saying that by buying items on its site, the couple had agreed to its terms of service, which it said included a non-disparagement clause, according to court papers filed in December 2013. The couple’s attorney says that KlearGear then reported the $3,500 as unpaid debt to the credit agencies, which harmed Palmer’s credit. “KlearGear attempted to punish a dissatisfied customer for his wife’s criticism of KlearGear, then abused the credit-reporting system in an attempt to extort money that the customer did not owe and could not possibly have owed,” the lawsuit filed by the couple against KlearGear claims. KlearGear failed to show up in court this month for a hearing on this case, Palmer’s attorney says; KlearGear could not be reached for comment.

The question many consumers have is whether a business can get away with this in court. The answer: It depends. UCLA constitutional law professor Eugene Volokh says that as a general legal rule, items agreed to in a contract are enforceable, but with respect to issues like these, the gotcha factor is critical. Volokh says that if a reasonable consumer would be very surprised by a clause, like a non-disparagement clause, in a vendor contract or a terms-of-service agreement, that provision of the contract might be deemed unenforceable. “You could see some of these invalidated,” he says. “This will be decided on a state-by-state level.”

How each state will decide cases like these remains to be seen, but for now, consumers should be wary. Read the fine print (we know, it’s annoying, but better than ending up in court) and look for terms like “a no-review policy,” “non-disparagement” and “agree not to disparage” — basically anything that implies that communicating something negative about the company comes with a punishment, says Winnika. And if you aren’t sure about something, ask about the company’s review policy, she adds, and know that contracts are negotiable.

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6 Ways to Start Your Own Business for Less Than $20

March 21st, 2013 | No Comments | Posted in Business

6_Ways_to_Start_Your-5cb3f0e0908b5378e9cc809fd560f557Tired of working that 9 to 5?  Got a great idea for a startup, but not a lot of money?  Launching your own business is not without it’s challenges, but getting the initial ball rolling when you are short on cash, doesn’t have to be one of them.  Here are 5 ways to start your own business for less than $20 ($16 to be exact…but whose counting)?

1. Logo from Fiverr – if I told you could get a great logo created for your company for only $5, would you believe me?  Well, sites like Fiverr.com make it possible for you to brand yourself in no time by connecting with creative types from all over the world, and at the cost of an average cup of coffee. Not bad at all.

2. Free Website – you’ll definitely want a corner of the world wide web you can call your own, where customers can find you and your products with ease.  So I suggest a website being one of the first things on your to-do list of starting your own business. For my frugal style blog (Frugal-Nomics.com), I use WordPress.org…installation is quick and loads of free plugins and widgets make it really customizable.  All you need to do is buy hosting from a site like Godaddy for like $5 bucks a month, and you are on your way.

3. Barter for what you need – I think bartering is a great way for startups to make relationships with other startups and get much-needed things done, without the exchange of capital (which you are probably both lacking).  So maybe you’re starting a small photography business and need some test subjects and you know some stylish bloggers who are trying to spread their brand as well….consider swapping some great pics for some praise worthy mentions on their site. I think it’s a win-win for both.

4. Get the word out – social media is one of the most convenient and free ways to reach hundreds of thousands of people (or even millions) from varying backgrounds and geographic locations, so why not take full advantage of it?  Sign up for a Facebook Fan Page, Pinterest Account, or Instagram and finally use Twitter to your financial advantage — promoting sales and releasing new products — instead of just venting about the juicy details on the latest episode of ABC’s Scandal.

5. Business Cards – for all the networking you are going to be doing with the new business you’ll be generating; you’ll need a way for leads, customers, and contacts to stay in touch. Use sites like Vistaprint to get you started with 250 free business cards, for only the cost of shipping ($5.99).

6. Start at home – There’s no need initially to run out and get a fancy office space. If Steve Jobs and Woz started what would become Apple in a garage…I think it’s safe to say you can start your business from the comfort of your living room (after all, that’s what I do).

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The Value of a Specialized 401(K) Audit

October 24th, 2012 | No Comments | Posted in Business

It can reveal hidden flaws and help you improve the plan.

Why do companies request specialized audits of their 401(k)s? After all, the standard annual audit that large companies routinely attach to Form 5500s may seem adequate. Yet a specialized audit may reveal things that have gone unnoticed for years, or conditions that should be improved.

There are four types of specialized 401(k) audits: operational reviews, investment option reviews, compliance audits and governance audits.

Operational reviews. Sometimes the procedures of a plan aren’t being followed – the plan document says something should be done one way, and in real life it is being done quite another way (or not at all). Maybe your plan document says that at the end of the plan year, any participant forfeitures of your company’s discretionary 401(k) contributions are to be reallocated among other plan participants. Well, maybe that hasn’t been done since 2007.

An operational review can help an HR officer uncover and fix these things before the Department of Labor or the IRS has to get involved. These audits are designed to make sure that recordkeeping goes according to the plan document, and they may even include analyses of employee investment patterns. That brings us to the next type of specialized audit …

Investment option reviews. What kinds of account fees are plan participants being charged by the plan provider? Do they seem high? Do other plan providers present more investment choices with lower fees? Is it time to evaluate the current investment options in light of the original IPS (Investment Policy Statement)? This type of review can assess the investment scope (and financial potential) of the current plan.

Compliance audits. You don’t want your plan to commit prohibited transactions or violate ERISA rules. So are payments and loans from the plan being made on time? Are account beneficiaries being named correctly? Have new hires been properly informed about the 401(k)? Are the vesting rules being correctly applied?

These audits confirm that a 401(k) is operating according to the plan document and federal regulations. If two plans have merged or a new plan has been adopted, or if one plan administrator has left and another has come in, these reviews may prove very illuminating.

Governance audits. Is the plan sponsor fulfilling its fiduciary responsibility? How well is the business managing and delegating the responsibility of running a 401(k)? That’s what these reviews are all about. Who is the named fiduciary? What is the degree of transparency? How thoroughly do the owners and HR officer understand governance requirements? You don’t want the IRS or Department of Labor to get the idea that you’re playing things by ear.

Worth the cost? Yes. These specialized audits can bring flaws in a 401(k) to light – leading to a 401(k) that is more efficiently managed, more attractive to new hires and key personnel, and more in line with rules and regulations.

w.petermontoya.com, www.montoyaregistry.com, www.marketinglibrary.net

Understanding the Roth 401k – Introduction, New Rules, Comparisons with Traditional 401k

February 17th, 2011 | No Comments | Posted in Business

Introduced in January 2006 under a provision of the Economic Growth and Tax Relief Reconciliation Act of 2001, the Roth 401k is different from the traditional 401k plan because contributions are made after-tax (meaning after tax has been deducted off your pay). The Roth 401k is very similar to the Roth IRA; investors receive no tax deduction on annual contributions, but any withdrawals or proceeds will not be subject to tax either. Investors who own 403b plans are also eligible to contribute to Roth 401k. The government was more than happy to introduce this new piece of legislation because it means investors will pay more tax now, rather than making salary deferral contributions as in the case of traditional 401k plans.

The Roth 401k works inversely with a traditional IRA. With a traditional IRA, an investor receives current tax deduction after making contributions. Instead of this money going to the IRS now, it will stay with the investor and he can invest it in stocks/bonds/mutual funds or real estate. Over time, this money will grow tax-deferred. The government likes this idea too because say after 30 years of investing in various stocks/commodities/real estate, an investor has grown his money from $50,000 to $200,000. If he withdraws this money from his IRA, he will have to pay taxes not on the initial $50,000 but on the whole $200,000!

The Roth 401k works inverse with the above idea. The money you earn this year is taxed this year. You make contributions to a Roth 401k from your after-tax earnings. When you reach the age of 59.5 or more, you are eligible to make withdrawals that are not taxable (because they have already been taxed). The prospect of receiving tax-free money upon retirement is an idea liked by many investors. The idea of receiving tax dollars now is very much liked by the government such that some senators have proposed getting rid of traditional 401k plans or IRAs.

Roth 401k Works Best if:

The federal government increases taxes over time
You are a high income earner who has a compensation cap on Roth IRAs (maximum compensation cap of $245,000 in 2011)
The mutual funds or stocks where you put your Roth 401k capital experience significant returns
You are a young investor and need more time for your account to grow across various investments such as mutual funds, stocks, commodities, etc.
You are in a lower tax bracket now and will be in a higher tax bracket upon retirement

Understand the Advantages of Roth 401k

i) Unlike the Roth IRA that has income limitations that will restrict high income earners from deducting the maximum tax off their earnings, the Roth 401k has no income limitations. The maximum compensation cap for Roth IRA is $101,000 for 1 individual, or $159,000 for for joint tax payers. In the case of the Roth 401k, there is no such compensation cap.

Note: The contribution limit for Roth 401k for 2011 is $16,500 for people under the age of 50, and $22,000 for people over the age of 50.

ii) Roth 401k provides tax-free withdrawals upon your retirement, and this idea is very appealing to investors.

iii) Also because of uncertainty regarding future tax legislation, it is better to lock in a lower tax rate now, than to wait upon retirement and pay taxes then. This is especially true for young investors who are earning lower incomes.

Disadvantages of Roth 401k

i) If you get terminated from your job or laid off and are forced to take a distribution of your Roth 401k assets, you are NOT exempt from paying taxes and will have to pay them.

Important Things You Should Know

Here are some of the important characteristics of Roth 401k that you should know about

i) Roth 401k is Voluntary – That’s right, Roth 401k is voluntary for employers. In order to offer Roth 401k for their employees, employers have to set up a tracking system that segregates Roth assets from the company’s existing plan. This tracking system is expensive to build and maintain, and employers may not choose to do it at all. If so, your employer will not be eligible to offer Roth 401k.

ii) Also, any matching contributions that your employer makes towards your Roth 401k must be deposited into a traditional 401k plan. Go figure!

iii) Unlike Roth IRAs, people who reach over the age of 70 and 1/2 must take minimum required distributions (MRDs) from their Roth 401k. This forces investors to take distributions even if they don’t want them or need them. Why wouldn’t they want them? Some investors like to leave behind inheritances for their children and grandchildren, and taking MRDs is not an option.

iv) If you think you are in a lower tax bracket now and will be in a higher tax bracket upon retirement, use a Roth 401k. If you think you will be in a lower tax bracket upon retirement and are thus in a higher tax bracket now, a traditional 401k makes sense.

v) Assets in a traditional 401k cannot be converted into a Roth 401k.

Unscrambling Fiduciary Confusion

February 17th, 2011 | No Comments | Posted in Business

By Matthew D. Hutcheson, MS, CPC, AIFA™, CRC®, an independent professional fiduciary and a nationally recognized authority on qualified plans and fiduciary responsibility.

Every now and then “industry experts” write and distribute confusing or misguided information that unintentionally helps professional fiduciaries. Upset and confused plan sponsors turn to professional fiduciaries to “unscramble industry messages.”

Plan sponsors want and need to rely on someone who is legally accountable to plan participants. It is confusing and frustrating to plan sponsors to discover the person they hired to help with its 401k plan has no real fiduciary responsibility and hence has no real accountability; accountability that plan sponsors and participants always believe existed!

In seeking clarity about the “type” of 401k professional it has retained, plan sponsors often find the answers they are given to be incoherent with a slant in favor of the 401k industry instead of plan participants. The residual fuzziness plan sponsors are left feeling about this topic is a source of significant irritation to them. Eventually a professional fiduciary will be sought to clarify the confusion, and by so doing, will establish an authentic relationship of trust with the plan sponsor. Professional fiduciaries stand to reap the benefits from the frustration and confusion generated by our well-intentioned colleagues.

Fiduciary Clarity

The various fiduciary roles for qualified retirement plans are spelled out in the Employee Retirement Income Security Act (ERISA). ERISA identifies six general categories of fiduciaries:

1. Named Fiduciary
2. Plan Administrator
3. Trustee
4. Investment Manager
5. Investment Advisor
6. Others that owe a duty of loyalty or act with discretion or authority “to any extent.”

1. The Named Fiduciary

A qualified retirement plan, as described in section 401(a) of the Internal Revenue Code (IRS), is one that meets the definition of a pension benefit or employee benefit plan under ERISA sections 3(2) and 3(3), respectively. Such a plan, most often a 401k plan established for a business, comes into being once plan documents have been drafted and signed.

A responsible party must be named in the plan documents with the duty and the power under ERISA to, in effect, “run” the plan. That party is called the “Named Fiduciary” and it is described in ERISA section 402(a). The Named Fiduciary, which can be an employee of the plan sponsor or even an independent party, has the duty to control, manage and administer the plan, according to ERISA section 402(a)(1). The Named Fiduciary is the primary decision maker in making a qualified retirement plan work; it is the person with ultimate day-to-day responsibility for that.

The Named Fiduciary is always considered a fiduciary within the meaning of ERISA section 3(21). That’s why I have referred to such a fiduciary as a “full scope” 3(21) fiduciary (see Sears Roebuck & Co., 2004 N.D. Ill. Mar 3 2004). This is merely one descriptive term for such a fiduciary but other terms that are used such as “full service trustee” or “discretionary trustee” could serve just as well in some instances. (see page 7 of “Evaluation of the Full Service Discretionary Trustee Services Offered by The American National Bank of Texas Wealth Management Group Trust Division,” July 2007, by Bruce Ashton and Debra Davis of the law firm of Reish Luftman Reicher and Cohen, now Reish & Reicher). The term “trustee” as used in this context is a misnomer, similar to when it is used to identify a custodian. However, when the terms “full service” or “full spectrum” are used as part of the description, they become an understandable proxy for Named Fiduciary. Whatever the descriptive term one chooses to ascribe to the primary fiduciary decision maker, that role will always “cover the full spectrum of administrative and investment duties of fiduciaries under ERISA.” In short, the full scope 3(21) fiduciary is THE Named Fiduciary; put another way, the Named Fiduciary is THE full scope 3(21) fiduciary.

An investment advisor is not, and never will be, the full scope 3(21) fiduciary unless the advisor’s name actually appears in plan documents as the Named Fiduciary with authority to hire, monitor, fire and replace service providers and other fiduciaries.

2. The Plan Administrator

The “Plan Administrator” of a qualified retirement plan is defined in section 3(16) of ERISA. The Plan Administrator should not be confused with a “Pension Administrator” or a “Third Party Administrator.”

The Plan Administrator has the following primary responsibilities:

  • Ensures all filings with the federal government (form 5500, etc.) are timely made;
  • Makes important disclosures to plan participants;
  • Hires plan service providers if no other fiduciary has that responsibility; and
  • Fulfills other responsibilities as set forth in plan documents.

ERISA sections 101, 102 and 103 describe the specific fiduciary responsibilities and duties of the Plan Administrator. As a practical matter, the plan sponsor will normally reserve these functions of the Plan Administrator for itself. But in some cases, a plan sponsor may appoint an independent fiduciary to serve as the ERISA section 3(16) Plan Administrator. Sometimes a federal court may appoint an independent person to serve as the Plan Administrator of a plan. In any event, the responsibilities and duties of the Plan Administrator are fiduciary in nature.

3. The Trustee

ERISA sections 403(a) and 403(b) describe the duties of the “Trustee.” The Trustee is a person or group of persons recognized as having exclusive authority and discretion over the management and control of plan assets; a subset of the overarching duty to control, manage and administer the plan. In other words, the responsibilities of the Trustee are specific and distinct from the responsibilities of the Named Fiduciary who has the duty to control, manage and administer the plan, although managing plan assets is also inherent in managing the plan. Therefore, it is not uncommon to see the Named Fiduciary also simultaneously serving as the Trustee.

Unlike the full scope powers of the Named Fiduciary, the Trustee possesses a specific scope of delegated responsibility. (People sometimes refer mistakenly to a custodian as the “Trustee,” but in the context of ERISA, the Trustee is the person that has responsibility and discretion for managing trust assets.)

Where the Trustee is a separate person or persons from that of the Named Fiduciary, the Trustee is accountable to, and monitored by, the Named Fiduciary. A Trustee can be a “directed Trustee,” meaning that it must take directions from a fiduciary with a higher level of authority. For example, the Named Fiduciary (i.e., the full scope/full service/full spectrum/full discretionary or whatever one wants to call the 3(21) fiduciary) could direct the Trustee to perform certain functions, or it could even replace the Trustee with another. Such a replacement may require changes to plan documentation, requiring plan sponsor involvement.

It is also possible for the full scope 3(21) fiduciary to appoint an ERISA section 3(38)-defined “Investment Manager” that will provide directions to the Trustee. In the absence of an ERISA section 3(38) fiduciary, the Trustee will generally retain its exclusive authority and discretion over plan assets until revoked by the Named Fiduciary. It is even possible for the Named Fiduciary to retain Trustee responsibilities, thereby serving as both Named Fiduciary and Trustee, which appears to be the fiduciary structure described in the white paper referenced previously.

4. The 3(38) Investment Manager

ERISA section 3(38) defines the “Investment Manager” as a fiduciary with full discretionary powers for selecting, monitoring and (if necessary) replacing the investment options (i.e., trust assets) in a qualified retirement plan. When appointed by an authorized fiduciary (e.g., the Named Fiduciary), the 3(38) takes an ascendant role over the Trustee. The Trustee then becomes “directed” by the ERISA section 3(38) Investment Manager. The 3(38) fiduciary is appointed, as noted, and monitored by the Named Fiduciary (or the full scope 3(21) fiduciary).

The 3(38) Investment Manager may hire and monitor other service providers relevant to its scope of responsibility. For example, the 3(38) will monitor fund managers (and replace them if prudent to do so), custodians and others. In such cases, it has the power and the duty to replace such service providers as it deems necessary and appropriate in its sole discretion.

The 3(38) fiduciary must also ensure that the objectives of the plan’s portfolios are being met, with all the attendant responsibilities associated therewith.

5. The Investment Advisor

The investment advisor is not a term ERISA defines in the same manner as the aforementioned fiduciaries. An investment advisor to a qualified retirement plan usually does not have discretion over plan assets per se, but may exercise a certain level of influence and control over the operation of the plan. In other words, the investment advisor may not have explicit discretionary authority over the operation of a plan, but may exercise effective discretion through its influence upon others. That influence could be referred to as implicit discretion. At a minimum, the investment advisor must meet a fiduciary standard of care and, like all fiduciaries under ERISA, bears a duty of loyalty to the plan and plan participants which requires the advisor to:

a. Put the plan participants’ best interests first;
b. Act with prudence; that is, with the skill, care, diligence and good judgment of a professional;
c. Not mislead plan sponsors or plan participants, but provide conspicuous, full and fair disclosure of all material facts;
d. Avoid conflicts of interest; and
e. Fully disclose and fairly manage, in the plan participants’ favor, unavoidable conflicts.

The investment advisor to a plan is always a limited scope section 3(21) fiduciary except when it is appointed as an ERISA section 3(38) Investment Manager. For example, the investment advisor does not replace the Trustee, or act with unilateral discretion with respect to the trust assets in a plan portfolio. It does not have the authority to establish its own fees or the fees paid to other fiduciaries. The investment advisor can only propose fees that may (or may not) be approved by a higher authority that’s described in the plan documents. Nor does it have responsibility to retain and pay legal counsel, auditors, consultants or other service providers on behalf of the plan generally. Those responsibilities normally are retained by the Named Fiduciary or Plan Administrator. If the investment advisor does not act in a 3(38) capacity, it will always be a limited scope 3(21).

The primary difference between a limited scope 3(21) investment advisor fiduciary and a 3(38) Investment Manager fiduciary is true explicit ERISA “discretion.” Investment advisors give advice and recommendations freely to plan sponsors who may choose to accept or reject it. Since a limited scope investment advisor has no discretion within the context of ERISA, though, they bear little or no liability for the consequences of their advice. This truly limits the role and value of a 3(21) investment advisor to plan sponsors in the fiduciary context of ERISA. On the other hand, a 3(38) (or the Trustee in the absence of a 3(38)) possesses true authority to make decisions at their discretion and with prudent judgment.

The difference between an investment advisor and a 3(38) can be described as the difference between someone in the back seat (i.e., the investment advisor) of a car giving directions to the driver (i.e., the plan sponsor) and someone who has the keys and actually has the responsibility to drive the car (i.e., the 3(38) fiduciary). Big difference! In my experience, the plan sponsor and Named Fiduciary wants someone to drive the car and be accountable for getting the passengers to their destination safely and efficiently. It’s easy to know that plan sponsors want an investment professional that is legally accountable to them and plan participants for fiduciary decisions that have real accountability. Just ask them.

6. Other Fiduciaries

Others fiduciaries include members of committees that could be appointed by the board of directors of the plan sponsor or the Named Fiduciary as well as others that may be acting in some fiduciary capacity under ERISA due to their actions. Although rare in practice, committee members may collectively serve as the Named Fiduciary and/or the Trustee. More commonly, however, committee members serve as a council, and report to the Named Fiduciary and Trustee on a regular basis. The investment advisor to a plan may participate as a member of a committee. The ERISA section 3(38) fiduciary may attend committee meetings, but a committee cannot dictate decisions to the 3(38).

A committee may be charged with monitoring other fiduciaries such as the investment advisor, the 3(38) fiduciary, the Trustee or even the Named Fiduciary. Monitoring a fiduciary with full discretionary authority, however, does not give the committee discretionary authority greater than that of the Named Fiduciary. Rather, monitoring is simply a prudent way to hold all fiduciaries accountable, regardless of the scope of their authority and discretion.

Conclusion

Expert professional independent fiduciaries understand how all of these fiduciary responsibilities work together on a day-to-day basis. After all, that is why plan sponsors retain them. Fiduciary experts do more than talk about the concepts of fiduciary responsibility; they live them each and every day in order to deliver their benefits to plan sponsors and plan participants. From many years of serving as an independent Named Fiduciary, I can attest that the best possible result for both sponsors and participants is to appoint a full scope ERISA section 3(21) fiduciary (i.e., the Named Fiduciary) which, in turn, appoints an ERISA section 3(38) fiduciary. This 3(21)/3(38) structure enables professional fiduciaries to take appropriate action when necessary and lower a plan’s cost structure below that of the prevailing market. It also gives plan sponsors a professional third-party to be held accountable for the prudent management of a plan. Appointing a limited scope 3(21) investment advisor may, however, adequately serve the interests of plan sponsor and plan participants in some cases.

In all instances, the plan sponsor retains the authority to remove and replace any fiduciary, even if has delegated all day-to-day responsibilities to others.

The terms “full scope,” or “full spectrum,” or “full discretion” are often used interchangeably to explain the depth and breadth of fiduciary authority and discretion under ERISA. I have chosen to describe those fiduciaries with the authority and discretion to perform all functions in a plan, whether such functions are delegated to other fiduciaries or not, as “full scope 3(21) fiduciaries” but any of these other terms are perfectly acceptable as well.

The fiduciary profession is an honorable and rewarding one. The roles and responsibilities undertaken by every fiduciary are important and valuable. Yet their true value must be conveyed to plan sponsors accurately in order to (a) fulfill statutory requirements prudently and (b) avoid creating frustration and confusion that comes from scrambled fiduciary messages.

The Small Business Jobs Act

January 10th, 2011 | No Comments | Posted in Business

What’s in it for businesses … and participants in 401(k), 403(b) and 457(b) plans.

The long-stalled Small Business Jobs Act cleared a big hurdle on September 16 – it passed by a vote of 61-38 in the Senate.1 The measure will almost certainly pass in the House and become law later this month.

So what is in this bill? Will its perks and offerings really lead employers to step up hiring? And did anybody report on the interesting provision for anyone with a 401(k), 403(b) or 457(b) retirement account?

Let’s take a closer look.

The $30 billion fund to encourage loans. To some this is a boon, to others just a discouraging “mini-TARP”. The yet-unnamed fund would lend $30 billion to community banks – and those banks are the drivers behind small business loans. These capital injections would come with financial incentives: while the banks would have to make recurring dividend payments to the U.S. Treasury as a condition of the loans, the payments could be lessened by 1% for each 2.5% expansion in small business lending the bank demonstrates. (Incidentally, any bank that has accepted TARP money from the Treasury could opt to convert to this program.)1

So how will this fund be funded? Over time, a chunk of the money will come from federal taxes resulting from Roth plan contributions. The Small Business Jobs Act contains a provision that would allow more individual investors to go Roth (see below). That would mean more tax revenue for the Treasury. Other money will come as result of diminished tax breaks, stiffer tax penalties and more stringent tax reporting requirements in the years ahead.2,3

$12 billion in projected tax breaks. The bill offers small business owners and small business investors some nice chances for federal tax savings. It would allow business owners to write off 50% of the cost of new equipment immediately, and raise the deduction for startup expenses all the way to $10,000. It would exempt long-term investors in certain small businesses from capital gains taxes. Owners of retail shops and restaurants could even get deductions for remodeling.3,4

Small business owners would also get a chance to deduct health insurance costs (for them and for their families) from self-employment tax for the 2010 tax year.4

Two tax relief items did fall by the wayside as the bill went through the Senate. Republicans wanted to make the R&D tax credit for small firms permanent, and they wanted to ease 1099 reporting requirements that could prove grueling for small businesses starting in 2012. They achieved neither goal.3,5

A news flash for 401(k), 403(b) & 457(b) plan participants. If the Small Business Jobs Act becomes law, participants in 457(b) plans will be able to treat their elective deferrals as Roth plan contributions starting in 2011. Additionally, the bill would permit those with 401(k), 403(b) and 457(b) accounts to roll over their pretax account balances into Roth accounts. According to the bill summary, a plan participant would be able to defer the taxes on the Roth conversion and split them over 2011 and 2012 if the rollover is made in 2010.6

Does this bill really address the issues facing small businesses? Conservatives don’t think so. In their view, all this bill does is offer businesses debt. Customers and cash are what these companies need, and they seldom arrive through government intervention. Liberals contend that the $30 billion loan fund and $12 billion in projected tax breaks will offer small businesses a lifeline at a very tough time, stimulate productivity and innovation, and ultimately lessen joblessness and help turn the economy around.

Citations
1 – marketwatch.com/story/senate-approves-small-business-aid-bill-2010-09-16 [9/16/10]
2 – bloomberg.com/news/2010-09-16/senate-set-to-approve-bill-opening-credit-incentives-to-small-companies.html [9/16/10]
3 – seattletimes.nwsource.com/html/nationworld/2012920552_smallbiz171.html [9/16/10]
4 – washingtonpost.com/wp-dyn/content/article/2010/09/16/AR2010091600568.html [9/16/10]
5 – reuters.com/article/idUSN1616203920100916 [9/16/10]
6 – pionline.com/article/20100916/REG/100919917 [9/16/10]

Is a 1099 Migraine Ahead?

October 14th, 2010 | No Comments | Posted in Business

Section 9006 of the health care reform bill is going to give businesses headaches.

 

Picture this … it’s a chilly morning in January 2012. You head out to your local office supply store to stock up on some essentials for your business – printer cartridges, copy paper, post-it notes, and a 500-pack of 1099 forms.

What? What was that last item again? 1099s? Yes, we may need them in bulk.

In 2012, you may need hundreds of 1099s. Why? Section 9006 of H.R. 3590 (the Patient Protection and Affordable Care Act, better known as the health care reform bill) has quietly ordered an enormous change in tax reporting.

Section 9006 says that starting on January 1, 2012, all businesses must issue 1099 tax forms not only to freelancers and vendors, but also to any individual, business or corporation from which they purchase more than $600 in goods or services in a tax year.1,2

Think about this for a moment. Let’s say that in 2012, you spend a few days in Dallas on business and stay at a nice hotel. If the bill is more than $600, you’ll have to give that hotel (and the IRS) a 1099 for your visit. Suppose you buy $900 worth of office furniture at a big-box retailer. Guess what: your company will have to give that retailer (and the IRS) a 1099.1

If you rent office space, you’ll need to send a 1099 to the IRS and your landlord. If your business buys a used truck worth more than $600, it will be time for a 1099. And so on.3

Even if you pay more than $600 incrementally to a business for goods or services in 2012 (i.e., you buy wine and sparkling water for your café every week from the same warehouse), you will still have to issue that business and the IRS a 1099.1,2

This means you’ll have to have taxpayer ID numbers for every freelancer, vendor and business from whom you purchase tangible goods and services.

Why would the government do this? The goal is better reporting, plain and simple. The IRS estimates that $300 billion (that’s billion) in tax revenue goes down the drain annually as a consequence of unreported income.1

If 1099s record the majority of payments a business makes, that means businesses and self-employed individuals will be less likely to understate revenue and overstate expenses. If you are looking for a silver lining in all this, here it is: in 2012, it will be easier to figure out precisely which business transactions need 1099s. If more than $600 is involved, the answer will be yes – that will be the only test.1

Is anyone working to repeal this change? Yes. Rep. Dan Lungren (R-CA) has introduced the Small Business Paperwork Mandate Elimination Act to try and get rid of this demand. At some point in 2011, the IRS will have public hearings on the new law and release regulations pertaining to it. Expect a loud, lively protest.4

Citations

1 – money.cnn.com/2010/05/05/smallbusiness/1099_health_care_tax_change/ [5/5/10]

2 – boston.com/business/personalfinance/managingyourmoney/archives/2010/04/healthcare_refo.html [4/12/10]

3 – cato-at-liberty.org/2010/04/26/costly-irs-mandate-slipped-into-health-bill/ [4/26/10]

4 – lungren.house.gov/index.php?option=com_content&task=view&id=620&Itemid=86 [5/14/10]

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